Solves for patent overlap

Patent pools, which allow competing firms to combine their patents as if they are a single firm, have emerged as a prominent policy tool to address a key problem with the current patent system: Imperfect boundaries of intellectual property rights allow multiple firms to own mutually infringing patents for the same technology, which they use to threaten litigation and prevent each other from producing the technologies. Patent pools can mitigate this problem by allowing firms to combine their patents in a “pool” which all firms can access to produce the technology and license it to outside firms. For example, pools have been proposed to cover improvements in smart phones, tablet computers, video compression technologies, malaria and HIV drugs, and diagnostic test kits for breast cancer.

What are the mechanisms by which the creation of a patent pool may discourage innovation? Intuitively, complementarities across pool patents should encourage innovation, as the creation of a pool resolves blocking patents, mitigates litigation risks for members, and reduces license fees and transaction costs for outside firms (e.g., Shapiro 2001; Lerner and Tirole 2004). The creation of a pool may, however, also discourage innovation as it reduces competition among members to improve substitute technologies. 15 Regulators are particularly concerned that pools, which combine patents for substitute technologies “are more likely to harm social welfare and than are pools of complementary patents” (Department of Justice and Federal Trade Commission 2007). In practice, however, it is extremely difficult to identify pools of substitute patents. 16